Extended warranties are an expensive gamble

Sunday

Apr 20, 2014 at 6:00 AM

Looking for an easy way to save hundreds on your next new car and simplify the buying process at the same time? Skip the extended warranty, says Consumer Reports.

The dealer will probably try hard to sell you one, telling horror stories about the thousands of dollars it can cost to replace an engine or transmission. But the odds are you'll never need the coverage, and even if you do, the money you'll save in repairs won't come close to what you paid for the added warranty.

A recent Consumer Reports survey found that 55 percent of owners who purchased an extended warranty hadn't used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.

Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties for all brands was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375. Factoring those who didn't use their policy, the median savings was zero. And that may have something to do with why satisfaction with automobile extended warranties is among the lower rated of all products and services surveyed by Consumer Reports, and why only about a quarter of respondents said they would definitely get it again.

Conducted by the Consumer Reports National Research Center in late 2013, the survey included responses from more than 12,000 Consumer Reports subscribers who purchased an extended warranty. The survey covers vehicles built during model years 2006 to 2010. Consumer Reports targeted those years to focus on vehicles that are typically no longer covered by a traditional three-year new-car factory warranty.

Reliability and satisfaction

When Consumer Reports asked car owners whose extended warranties had taken effect how satisfied they were with their experiences, the most satisfied were primarily owners of less-reliable brands, including BMW, Chrysler, Dodge and Mercedes-Benz. Those are all brands that have had average or below-average reliability in its Annual Auto Survey. Interestingly, some of these brands also had the most expensive extended warranties, with Mercedes-Benz owners paying $2,200 on average, followed by BMW owners, at $2,007, and Chrysler owners, at $1,525.

The reason for those owners' higher satisfaction may be that they tended to use the coverage more often than owners of cars from historically reliable brands. That probably helps consumers feel more justified about having spent money for the coverage — a bittersweet way to rationalize the purchase.

Conversely, owners of Hondas, Subarus and Toyotas — perennially high-ranking brands for reliability — were among the least satisfied overall with their extended warranties. They were also far less likely to have used them, compared with owners of most other brands' models. Just 39 percent of Honda and Toyota owners reported having used their coverage, followed by only 36 percent of Subaru owners. Not surprisingly, owners of those brands were among the least likely to say they'd definitely purchase the coverage again; less than a quarter of policyholders for each make said they would do so.

Instead of buying the warranty, Consumer Reports recommends investing that $1,200 in an interest-bearing account. That way, you'll have an emergency fund if a post-warranty problem arises. And if your car doesn't need pricey repairs, you'll already have the money for a down payment on your next car.